First, let me recommend Mark Thoma, who takes apart Sachs’ very crude representations of Paul Krugman’s positions. I want to circle back to one particular point that leaped out at me:

One of the Obama arguments at the time was that the rush in the stimulus program was needed to avoid a Great Depression. This was and is highly doubtful (though, yes, it is widely accepted). The US economic emergency in late 2008 and early 2009 wasn’t really an aggregate demand crisis but a financial crisis. The chaotic failure of Lehman Brothers had led to an intense panic and credit squeeze. The Fed therefore needed to flood the markets with liquidity, which it rightly did, in order to unwind the panic. The Fed’s action was the real difference with 1933 (when the Fed allowed the banks to fail). It was the Fed, not the fiscal stimulus, which prevented a fall into depression.

Emphasis mine. I was under the impression that the basic consensus economic story of the 2008-9 crisis was that yes, we had a banking crisis. According to accounts like Gary Gorton‘s, this differed in many details from previous versions in that it involved the repo market and a bank run driven by institutions, not individuals, but was of basically the same character of financial panics of ages past.

And financial panics cause aggregate demand crises. Banks fold up or get very shy with credit, suddenly nonfinancial institutions can’t get loans and they fold up or shrink, leading to layoffs, which means people have less money, which means less total spending, further hurting businesses, in a self-perpetuating cycle. There are other aspects of the current economic problem—notable the huge buildup in housing debt, which left many homeowners underwater on their mortgages or otherwise wealth constrained. But saying it “wasn’t really an aggregate demand crisis but a financial crisis” is like saying “this man doesn’t have blood loss, he has a gunshot wound!”

Furthermore, it is true that the Fed did flood the zone with liquidity, but they also let inflation expectations crash in late 2008, a classic sign of a collapse in aggregate demand—as if you have less spending, you’ll have less bidding on goods and services and prices will fall to compensate. And they not only failed to push inflation back to level until 2010, they didn’t give us the period of catch-up price level increase that would have been justified by such a long period of undershooting.

So, Professor Sachs, what did cause the enormous collapse in GDP pictured above? The Great Vacation theory, what?

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Follow Ryan on Twitter @ryanlcooper. Ryan Cooper is a national correspondent at The Week. His work has appeared in The Washington Post, The New Republic, and The Nation.